Question

Alberto Inc. just paid its annual dividend of $2.00 per share. The firm is expected to grow at a rate of 10 percent for the next two years and then at 6 percent per year thereafter. The required return of Alberto Inc. is 12%. Find the expected price of the stock in one year, P ̂_1.

Answer 1

Dividend of year 1= current dividend * (1+ growth rate) = 2*1.1=2.2

Dividend for year 2 = dividend for year 1 *(1+ growth rate)= $ 2.2*1.1 =2.42

Dividend for year 3 =dividend for year 2 *(1+ growth rate) = $ 2.42 *1.06 =2.5652

Price at the end of year 2 =dividend at year end 3 /(required return-growth rate) = 2.5652/(0.12-0.06)

=$ 42.75

Price at year end 1 = Present value of price at year end 2 and dividend at year end 2 = $ 42.75/1.12 + 2.42/1.12

=$ 38.17 +2.16 =$ 40.33